Tax Investigators can Adjudicate Too? Deconstructing the Recent Supreme Court Verdict

Setting the context

Principles of natural justice are intrinsically intertwined to overwhelmingly injunct executive acts from trampling the citizens’ rights. It is too late in the day to claim otherwise. That justice must not only be done but must also seem to be done, is a distinct facet of the natural justice principles. At another level the principle exemplifies into the “rule against bias”, wherein the actions of every authority, be it executive, quasi-judicial, or judicial, are open to dissection and review inter alia on grounds of probity and impartiality.

The fact that provisions of fiscal statutes are entrusted, for administration and implementation to executive officers (rather a specialised set of government servants colloquially referred as tax authorities) the principles of natural justice, which are generally considered as a facet of administrative law, find themselves transcended beyond to govern the conduct of these tax authorities in the enforcement of taxing statutes too. Consequently, significant jurisprudence in the fiscal law space owes its origin to administrative law concepts which in turn are inspired by the natural justice principles. To illustrate, the manner in which a show-cause notice directed towards a citizen should be drafted by a tax authority¹, right of cross-examination², sufficiency of opportunity to the citizens to defend the proceedings initiated by the tax authorities³, etc. are certain illustrations of principles of natural justice not just being imported in the fiscal law space but also instituted as axiomatic governance pivots which overwhelm actions of tax authorities to the contrary.

It is in this context that a rather tenacious question has arisen; does the citizen has a right to object to the holder of the tax authority office and contest that a particular tax officer is disqualified to act as an adjudication officer owing to the implied “bias”, or otherwise, which inherits such office. For illustration, can the citizen object discharge of adjudication function by a tax officer holding charge of the Tax Investigation Department inter alia alleging that the tax investigator cannot be expected to maintain fairness and dispassion in carrying out the adjudication function? These questions have arisen because the Supreme Court of India, upon a technical reading of the law, has recently upheld the decision of the Government appointing tax investigators as tax adjudicators. This post seeks to deconstruct the decision to enlist the larger fairness-related principles which still appear to linger on despite the decision.

Background

Before adverting to the decision of the Supreme Court, it is expedient to revisit the issue and, in fact, the reason for the issue to arise. Undoubtedly, tax administration requires diverse sets of qualitative attributes to address different responsibilities for the enforcement of the fiscal law paradigm. For expediency in administration, tax authorities are assigned execution of earmarked function, such as policy formulation, research and training, human resource management, etc. besides the core function of tax assessment of the subjects. Similarly, tax investigation is considered as specialised tax wherein the officers concerned are responsible to unearth unreported transactions, counter nefarious and errant behaviour, book violations, etc. By default, and design, therefore, the investigation teams are often susceptible of acting on suspicion, intelligence, hot pursuits, etc. and, in appropriate cases, even arrest the offenders exercising powers similar to police officers. Their actions may bring fruit in identifying the perpetrators of revenue fraud, etc. However, in a different aspect, that depends upon the outcome of the dispute settlement system and the judicial process.

Having said that, the constitutional stipulations and canons of fair conduct by tax authorities must nonetheless be observed. Thus, traditionally, the tax administrations have followed an unwritten rule of proscribing adjudication by the tax authorities manning investigation roles and assigning the adjudication tasks to independent set of officers, often rechristened as “assessing officers”. By having hedged the investigation and adjudication function, the tax administration not just relieves the citizen of doubts upon the impartiality in adjudication but also does self-service by ensuring an internal qualitative review of the investigation with a fresh pair of eyes through the assessing officers.

Trouble brews, however, when there is an interest clash between the investigation officers and assessing officers, the latter refusing to know-tow the lines of former and seeking to dispassionately apply the legal principles, often resulting into dropping of cases booked by the investigation wings. Such internal squabbles are routinely addressed, and the fire doused, by the tax administration by ad hoc interjections or formal instructions to iron out the respective roles of the different set of authorities. However, it is not always the case. Often the officers carrying out the investigation function are able to impress upon the policy formulators in the tax administration of the need to assign adjudication role too to the investigation teams for reasons more than one, such as, stance of assessing officers being perceived too-liberal citing frequent acquittals and dropping of investigation cases; inability of assessing officers to act swiftly in sensitive tax avoidance cases owing to their routine work load, the assessing officers’ limited visibility of trends vis-à-vis national and cross-border intelligence available to investigation officers, etc.

The decision of the Supreme Court deals with one such instance wherein the Central Board of Excise and Customs (CBEC), which has now been rechristened as Central Board of Indirect Taxes and Customs (CBIC), permitted a set of investigation officers, namely, the officers of Directorate of Revenue Intelligence (DRI), to additionally undertake adjudication of cases booked by them in addition to their core responsibility of investigating instances of violations of customs law. A challenge was raised by the taxpayer, building upon an earlier decision of the Supreme Court in Commr. of Customs v. Sayed Ali⁴, to contend that the DRI officers are not technically competent to carry out adjudication roles. This challenge was rejected by the Bombay High Court in Sunil Gupta v. Union of India ⁵, but was accepted by the Delhi High Court in its decision in Mangali Impex Ltd. v. Union of India⁶. Subsequently, the Supreme Court in its decision in Canon India (P) Ltd. v. Commr. of Customs⁷ also accepted the submissions of the taxpayers and declared that the DRI not being “proper officer” for the purpose of adjudication, could not book customs violations or adjudicate them.

Challenging the correctness of this decision in Canon India case⁸, the Government filed a review petition before the Supreme Court. In the meanwhile, the Parliament also amended the relevant provisions of the customs law, in fact with retrospective effect, with an accompanying validation provision to validate the past actions of the DRI officers. This amendment was also pressed upon by the Government in the review petitions before the Supreme Court.

Accepting the Government’s prayer and allowing the review petition, the Supreme Court in its recent review decision⁹ had held that the conclusion in its earlier decisions in Sayed Ali case¹⁰ and Canon India case¹¹ were erroneous, and, in view of the statutory scheme of customs law, DRI is empowered to issue notices for violation of customs law and adjudicate them. The Supreme Court also rejected the reasoning of the Delhi High Court in Mangali Impex case¹² and approved the view of the Bombay High Court in Sunil Gupta case¹³ to opine that there was no legal impediment for DRI officers as projected by the taxpayers.

Dissecting the decision of the Supreme Court in review petition

Unlike a regular appeal, there is a different standard of appreciating a review petition, review of an earlier decision not being a matter of course. In terms of the relevant provisions and settled law, a review or an earlier decision is permissible on limited grounds i.e. if there is a mistake or an error apparent on the face of record.¹⁴ Thus, it was incumbent upon the Government to demonstrate, which it successfully did,¹⁵ that certain valid and necessary aspects relevant for determination of the list were not considered by the Supreme Court in its decision in Canon India case¹⁶. Thus, the Supreme Court found it necessary to reconsider its decision and, while doing so, being in seisin of the matter, it also chose to holistically consider all related and connected issues, including challenge to the validity of the amendments made subsequent to the decision in Canon India case (i.e. petitions challenging the constitutional validity of Section 97 of the Finance Act, 2022) besides the determination of “the issue of whether the officers of DRI would be proper officers in light of Section 28(11)” of the Customs Act, 1962.¹⁷

The Supreme Court, reviewing its decision in Canon India case¹⁸, concluded that the adjudication function exercised by the tax officers (under Section 28 of the Customs Act) was in the nature of a quasi-judicial function and was envisaged as a statutory function. Thus, “the possibility of chaos and confusion due to the potential for multiple proper officers exercising jurisdiction”, which was a key reason for limiting the powers of DRI in its earlier decisions in Sayed Ali case¹⁹ and Canon India case²⁰, was upon an incorrect appreciation of the statutory scheme.²¹ The Supreme Court further concluded that the statutory provision²², the non-compliance of which formed the raison d’etre for declaration of invalidity in Sayed Ali case²³ and Canon India case²⁴ was altogether irrelevant and thus, there was another fundamental reason to overrule decision in Sayed Ali case²⁵ and review the decision in Canon India case²⁶.

The Supreme Court further rejected the challenge to the constitutional validity of the relevant provisions and, simultaneously, relied upon the settled legal position to the effect that “the possibility of misuse or abuse of a law which is otherwise valid cannot be a ground for invalidating it”²⁷ to opine that, in such backdrop, the decision of the Delhi High Court in Mangali Impex case²⁸ could not be approved as if laying down the correct legal position.²⁹ In other words, the Supreme Court dismissed the challenge to the Government’s notification empowering the DRI officer as if it would lead to chaos on account of multitude of officers addressing the same issue,³⁰ particularly in the wake of a submission made by the Government that it followed a “policy” that “once a show-cause notice is issued, the jurisdiction of other empowered proper officers shall be excluded for such notice” because the Supreme Court found “such policy acts as a sufficient safeguard against the apprehension of chaos or confusion or misuse”.³¹

Implications of the decision

The review decision does not just stop at reviewing the decision in Canon India case³². It goes beyond to pass operative directions as regards the cases wherein the decision in Canon India case³³ has been relied upon or invoked to claim annulment of proceedings initiated by the DRI. Passing omnibus directions to remit the matters back for adjudication on merits, the technical challenge to the jurisdiction having been repelled in this review decision, the Supreme Court has directed recommencement of all such proceedings which may be pending before one or the other forum. This aspect has significant implications in view of the fact that a very large number of customs proceedings were halted in view of the declaration of invalidity of DRI actions in Canon India case³⁴. To put things into perspective, this review decision alone has disposed more than hundred appeals, which obviously implies that the cumulative stock of the matters pending before High Courts, tribunals, appellate authorities, adjudicating authorities would go much beyond. All these matters, which have been pending for a considerable period of time, are now ripe for determination and thus, the review decision will ignite tides of adjudication by customs authorities.

More critical than the scale of impact of the review decision are its qualitative attributes. The decision comprehensively addresses all wakes of technical challenges to the jurisdictional competence of the DRI officers (and specifically extends the findings qua DRI officers to all other similarly placed officers), having analysed the scheme of the customs law and the maze of subordinate legislations issued thereunder. In macro terms, therefore, the review decision places DRI and other similarly placed officers at the same pedestal as regular Customs Officers who have been assigned the adjudication function. Furthermore, the observations in the review decision are such widely worded that the Government has been given a wide latitude to assign adjudication function — by a mere notification to such effect — to virtually assign the adjudication function to any class of Customs Officer. While this may be technical victory for the Government, it nonetheless places the Government under more obligations. This is because it is incumbent upon the tax administration to ensure that the officers who are assigned the adjudication function — it being a quasi-judicial function governed by innate judicial fiats and overarching constitutional and administrative law doctrines — are fully trained with the necessary judicial tools and the necessity of scrupulous compliance with these aspects has been fully impressed upon them. That constitutional stipulations are to be honoured and administrative law doctrines are to be diligently applied is a given and it is immaterial as to whether the adjudicating authority is a regular Customs Officer entrusted with the adjudication function or it is the DRI officer exercising such power. Thus, with this review decision, by approving the discharge of adjudication function by DRI and other similarly placed officers, the Supreme Court has virtually placed the onus upon the Government and tax administration to ensure due satisfaction of these pivotal variables of governance.

Postscript

Upon an appraisal of the review decision, it is not clear if the taxpayers pressed upon the rule against bias or similar conceptual canons to contend that it is fundamentally unfair to entrust adjudication functions to investigation officers. Neither the review decision records that the key role and Government assigned responsibility of DRI officers is to collect intelligence and carry out investigation nor does the review decision appear to address the large impact of the convergence sought by the Government wherein the same class of officers carry out both investigation and adjudication function. Instead, the review decision appears to be limited to appreciating the statutory provisions and notification issued thereinunder to examine whether technically DRI officers have the jurisdiction to carry out adjudication related functions. In doing so, thus, short shrift appears to be given to the conceptual implications of permitting the same class of officers to investigate and adjudicate, the foundational elements of impartiality, fairness and reasonableness being the immediate casualty in this outcome. One would hope that these large issues do not get lost in the quest for an expedited determination of customs matters, and, the riot does not spread amongst other fiscal legislations by systematically empowering investigation agencies under other tax laws to adjudicate disputes thereunder.

It must be remembered that a pivotal directive principle enshrined in the Constitution implores the State machinery to ensure that it takes steps to separate the judiciary from the executive in the public services of the State.³⁵ Whether quasi-judicial adjudication by investigation officers meets this cherished ideal, however, appears a question postponed for determination by the Supreme Court. One would hope that this conceptual principle-based objection to such adjudication is addressed sooner than later, preferably at the altar of judicial scrutiny instead of a temporarily quelling of the issue through another administrative act of the Government.